Grace Wanjiru Munyinyi & Another v Gedion Waweru Githunguri & 5 others [2011] KECA 42 (KLR)
The bottom line
#Kenya's Court of Appeal reinstated a shareholder's lawsuit, ruling that mental incapacity must be proven with real evidence and minority shareholders can sue in certain cases.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the learned Judge of the High Court erred in finding, without evidence, that Moses Munyinyi Mbogo was of unsound mind and that the Power of Attorney donated by him was a nullity
- 2.Whether the appellants' suit, instituted by donees of a power of attorney, was incompetent as an improper manner of vindicating grievances concerning the internal management of the company, or whether it was a sustainable derivative or direct action
Key legal issues
#Presumption of soundness of mind and burden of proving incapacity
The High Court erred in declaring Mbogo of unsound mind and the Power of Attorney a nullity; the presumption of soundness was never displaced by evidence, as the directors' assertion rested only on an untested affidavit and an unenforced court order for Mbogo's production and medical examination.
The law presumes every person of sound mind until the contrary is proved, following Wiltshire v Cain and the Commonwealth line (Molton v Camroux, Imperial Loan Co v Stone, York Glass Co v Jubb). To avoid a transaction, the person asserting incapacity must prove both the incapacity and the other party's knowledge of it. Here the directors themselves sought an order for Mbogo's appearance and examination by a doctor, which was never pursued; no medical or tested evidence was before the court, so the finding of incapacity had no evidentiary basis.
Rule in Foss v Harbottle and exceptions; competency of the suit as derivative or direct action
The suit was sustainable and should have been heard on its merits. The complaints of ultra vires conversion of company assets and exclusion of a shareholder from participation fell within exceptions to the rule in Foss v Harbottle, so striking out the plaint for non-compliance with section 211 of the Companies Act was erroneous.
While the proper plaintiff for a wrong to a company is the company, exceptions exist where the alleged wrong is ultra vires or illegal, where special voting procedures are defeated, where individual member rights such as voting rights are invaded, and where there is fraud on the minority. The appellants alleged the directors were converting company assets to uses ultra vires its objects - tantamount to fraud not ratifiable by simple majority - and sidelining Mbogo's individual shareholder rights, entitling them to sue.
Legal principles established
#- Every person is presumed to be of sound mind until the contrary is proved, and the burden of proving mental incapacity, including the other party's knowledge of it, lies on the person who asserts the incapacity.
- A power of attorney donated by a person of unsound mind is a nullity; but a finding of unsoundness of mind must be established by evidence, not by untested affidavit averments.
- The rule in Foss v Harbottle applies in Kenya, subject to exceptions (ultra vires/illegal acts, special majorities, invasion of individual rights, and fraud on the minority), in which a derivative action or direct suit by a member may be brought.
- Section 211 of the Companies Act (oppression remedy) is an alternative remedy to winding up and does not preclude a member from bringing an ordinary or derivative suit within the Foss v Harbottle exceptions.
Court orders
#- 1.The ruling of the High Court made on 17th June, 2005 and all consequential orders are set aside
- 2.Substituted therefor is an order dismissing the Chamber Summons dated 16th September, 2004
- 3.The main suit is reinstated for hearing before a Judge of the High Court, other than Kimaru J
- 4.Costs of the appeal, and of the chamber summons before the High Court, shall be borne personally by respondents 1 – 5
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court of Kenya at Nakuru
- H.C.C.C. No. 116 of 2002
- Jurisdiction invoked
- First appellate jurisdiction over the High Court (ruling striking out a suit), Court of Appeal at Nakuru
Relief refused
#Any order interfering with the internal management of the company or decisions of the majority directors as such
A wrong done to the company that can be ratified by simple majority is for the company alone to vindicate; the court preserved the rule in Foss v Harbottle subject to its exceptions
Costs
Costs of the appeal, and of the chamber summons before the High Court, shall be borne personally by the respondents 1 – 5.
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
The upshot is that the appeal succeeds. The ruling of the High Court made on 17th June, 2005 and all consequential orders are set aside and substituted with an order dismissing the Chamber Summons dated 16th September, 2004.
The main suit is reinstated for hearing before a Judge of the High Court, other than Kimaru J. Costs of the appeal, and of the chamber summons before the High Court, shall be borne personally by the respondents 1 – 5.
The starting point is the presumption that must always exist, until it is proved otherwise, that every person is of sound mind.
There was thus no medical or other evidence to establish the mental incapacity of Mbogo. All that there was was an affidavit sworn by one of the directors which was not tested in cross-examination.
The rule in Foss v Harbottle still stands in Kenya.
Whether, in this case it be “derivative action” or direct suit on any of the grounds, it was in our view a sustainable suit and it was for the High Court to consider it on its merits.
Issues in the judgment
#The Chamber Summons is stated to be dated 22nd September 2004 in the body of the judgment but the final orders refer to a Chamber Summons dated 16th September, 2004.
The judgment records the striking-out application as argued on 1st March, 2005 before Kimaru J, but also states the application was set down for hearing and argued one year later on 1st March, 2005 following a mention on 1st March, 2004; the internal chronology is confusing.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Grace Wanjiru Munyinyi & Another v Gedion Waweru Githunguri & 5 others [2011] KECA 42 (KLR)", Case Analysis (2011). Civil Appeal No. 202 of 2005. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2011/42/eng@2011-11-11
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.